Originally published in the News Star on Sunday, January 24, 2016
Question: All I hear is China, China, China and the stock market keeps falling deeper and deeper into a hole. I’m seeing my portfolio lose money it seems daily. What should I do?
Answer: “A schedule defends against chaos and whim.”
Or so says Pulitzer Prize winner Annie Dillard. She probably meant that as a call for daily discipline as a writer, but I see much wisdom for investors as well.
Much of the time financial markets look a lot like chaos and whim.
There seems to be little rationale behind specific periods of market advances or declines. Everyone has known the Chinese economy could not keep growing at double digits year over year. But all of a sudden, a straw of information breaks the camel’s back of equity optimism and now your economic world has been flushed away and is swirling down the financial toilet.
Is that melodramatic enough for you?
As I type these words the US stock market has fallen by a sufficient amount to be considered a “correction,” or a 10% drop from its most recent peak. China’s own stock market has fallen by 20%, enough to be considered a bear market over there.
Is our own stock market destined to do the same?
No one can know that in the short term. If history is any indication, you can feel pretty certain the United State stock market will go into bear territory, losing 20% or more of its value, at some point in the future – sooner or later.
If it doesn’t this year, it will most likely happen some year…because that’s what markets do. They breathe. They expand and they contract, responding and reacting to the short term “chaos and whim” of the markets, as well as the long-term expansion of profits, as capital is moved from lower performing actors to better (higher) performing ones.
That is the purpose of markets – to direct capital (money) into the places where it can be most efficiently deployed. It’s a process that occurs by millions (billions one day?) of people voting through their buying and selling, and thereby declaring who they believe will ultimately succeed.
In the short term it is an ugly, disorderly and dangerous process. In the long-term, it has historically been elegantly efficient and magnificently rewarding to its long-term participants. But I cannot emphasize enough that long term can sometimes take a long time. Maybe more time than you’ve got.
That’s why I say that investing without a plan is really speculating.
First, you need a financial plan, addressing your protection, savings, debt, tax, investing and estate needs. You’ll notice that investing is a part, not the totality, of a financial plan.
Second, you need a portfolio plan, or a plan for how you will invest. This means not only deciding what you will invest in (stocks, bonds, real estate, private business, precious metals, cash), but how you will handle the inevitable bear markets.
If you have a balanced financial plan with a coordinated portfolio plan, the answer for most periods of short-term chaos and whim is “hang in there and do nothing. Don’t panic. Keep the faith.”
But that’s a hard sell to a speculator who thought himself an investor but now realizes he’s not.
We can’t back up the calendar, so no answer I give you will feel optimal.
But go back to square one, have a financial plan done; then adopt a portfolio plan that syncs with your financial plan.
Otherwise … I hope you like chaos and whim.
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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.